Tax-loss harvesting helps investors reduce tax liabilities by selling loss-making stocks to offset capital gains. In India, capital gains tax depends on the holding period:
- Short-Term Capital Gains (STCG): Stocks held for less than 12 months are taxed at 15%.
- Long-Term Capital Gains (LTCG): Stocks held for over 12 months are taxed at 10% if gains exceed ₹1.25 lakh.
How to Use Tax-Loss Harvesting
- Identify Loss-Making Stocks: Look for investments that have significantly dropped in value.
- Sell to Book Losses: Selling these stocks allows you to realize capital losses.
- Offset Gains: Use these losses to reduce your taxable gains.
- Reinvest: Buy similar stocks to maintain your investment strategy.
Example
Suppose you have a long-term capital gain of ₹4 lakh and a long-term capital loss of ₹2 lakh from another stock. By offsetting the loss, your taxable LTCG reduces to ₹2 lakh. After applying the ₹1.25 lakh exemption, you are taxed only on ₹75,000, reducing your tax burden.
Key Benefits
- Set-Off Flexibility: Short-term losses offset both short- and long-term gains, while long-term losses offset only long-term gains.
- Carry Forward Losses: Unused losses can be carried forward for up to eight years.
Using tax-loss harvesting wisely can help investors lower taxes and improve portfolio efficiency.